Hamish Douglass: China is the opportunity of the next 20 years

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Glenn Freeman: Glenn Freeman here at the Morningstar Individual Investor Conference. And I'm joined by Hamish Douglass from Magellan.

Thank you for your time.

Hamish Douglass: It's a pleasure to be here, Glenn.

Freeman: Politics is something that you can't avoid when you're talking about global equities. And China, in particular, is something that is an area that you've always had quite a strong presence in. What is your thinking there about this market now?

Douglass: Well, China is a very, very interesting market. I think it's going to be a fundamental market for the next 10 to 20 years. It's already the second largest economy in the world and it is going to become the largest economy in the world and there's some very, very positive secular drive factors that's going to drive economic growth and particularly consumption growth. We are very interested in areas of structural secular growth that could play out in maybe 10-plus years. We've been in places like the digitalization of payments. We've been in Visa and MasterCard for the last decade. That's actually been compounding at the revenue line around 12 per cent per annum. We've made 7 times our money. Growth like that is very, very valuable. And there's actual structural growth sitting there in China. And it's of scale, that companies who participate and get meaningful market shares, they're going to become very, very large businesses. So, that's the attraction of China.

The question is, how do you play China with the political risk. Even within the country, it's opaque. In most large business businesses, there's Communist Party, sales operating inside of the companies, which goes down to critical appointments of personnel in these companies. One of our largest investments is a Chinese technology business called Alibaba. Foreigners can't own directly an interest in a Chinese technology company. So, we own it via more of a synthetic structure called variable interest entities. There is risk that Chinese government could change the rules around that. So, there's risk around that. There's opaqueness around the system. But the prize is absolutely enormous.

What I would say to you, we've been spending for years of really trying to understand the nature of the risks that we're facing. I would also argue to you that anywhere we're investing in the world we're facing political risks. You invest in the U.K. at the moment, you're facing a Brexit risk. If you've got a Labor government in there, in the U.K., it would probably make China look like the teddy bear's picnic. We've got a presidential election being fought out in the United States, the battle of the Left and the Right.

What I'm saying to you is, you need to understand these risks. And just because you're in a country, like the United States or the U.K., you shouldn't just assume a way that the political risk down doesn't exist. And just because we're less familiar with China somebody is saying we shouldn't invest there at all, because we're unfamiliar. When the prize is so large, you need to understand the risks and then it comes down to portfolio construction. But China, I think is the opportunity of the next 20 years and finding the right way to invest and get exposed to China – we obviously own Alibaba. We've got very large positions in businesses whose future is going to be driven by Chinese consumers. LVMH, which is the world's largest luxury goods company, it has one-third of its sales being sold to Chinese consumers already. Estée Lauder, we own, the same factor, around a third of their sales is going to Chinese consumers. Those parts of their businesses are growing at 20% to 30% a year at the moment. Starbucks, we've been in a – you know, we estimate maybe 40% of the total growth of the company, it's a relatively small part of the business, but 40% of the growth in the next decade is going to come out by the rollout of their China business.

Freeman: I mean, in terms of global technology, there's been a lot of buzz for a long time now about the global tech. And is your viewpoint on this this sector still as bullish or no? I know you are a bottom-up maybe…

Douglass: Well, first of all, I would say, Glenn, the term tech is a very, very broad term and a very, very misleading term. They'll try to find WeWork. WeWork is not a technology company, but it was being sold. It's a sub-leasing company. I think Uber has a pretty fluid business model. You have semiconductors within tech. So, you've got people who produce hardware; you've got software companies; you've got advertising platforms, like Alphabet which is Google and Facebook; you've got enterprise software companies like Oracle and SAP and Microsoft. We view that we want to be in very, very specific type of companies. Facebook and Google, they're facing political, regulatory risk at the moment. But they are two of the greatest business models the world has seen in the last 50 years. And we still think they've got a very long way to run in terms of the economic potential and the size of the markets.

We've got cloud infrastructure hosting. That is one of the largest addressable markets in the world, where businesses around the world and governments are going to shift their computing power from on-premise servers to large data centers in the world. And as we start to roll out more 5G technology in the world, most devices, fridges and televisions and you name it, devices and cars, are going to be connected to the internet. Where is all that data going to be hosted and served?

Freeman: Talking AWS then?

Douglass: So, we're talking about AWS, which is owned by Amazon. We're talking about Azure, which is owned by Microsoft. We're talking about Google Cloud, which is obviously owned by Alphabet. We're actually talking about Alibaba Cloud that's owned by Alibaba in China. You want to get exposed to that area, and we are. We own three of the four big large players. We don't own Amazon, but we own three. We own Alibaba and we obviously own Microsoft and we own Alphabet, which owns Google. So, I would argue that we're taking very, very specific slices of sub-segments of technology in industry leaders, and we're in businesses that we think are fundamentally undervalued.

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